Digit, the San Francisco challenger bank that pioneered automated savings, has added automated investing for retirement and long-term goals to its feature set.
The algorithm Digit’s designers originally created would look at a user's income, monthly bills and daily expenses and determine how much money could be siphoned off into savings periodically without the customer ever missing it. The app would make these small fund transfers frequently, sometimes daily.
Digit then applied the same concept to automatically paying off credit card bills and student loans, again finding those small amounts of cash a user could live without and apply it toward paying off debt.
On Wednesday, Digit rolled out a new service in which it will periodically invest customers' extra cash in an individual retirement account or a long-term investment account set up to meet some other goal.
According to the Center for Retirement Research at Boston College, 59% of consumers aged 30 to 39 are at risk of being unable to maintain their pre-retirement standard of living after retirement. Among those aged 40 to 49, 55.3% are at risk and among those 50 to 59 years old, 51% are at risk.
“All of us know we should be saving more for our retirement,” said Elena Gorman, product marketing lead at Digit. “We know our members are not saving for retirement in a tax-advantaged way. We also heard from people that investing is interesting to them, but they don't feel like they know enough about investing or that they have enough money to invest and make an impact.”
Digit’s service is meant to make saving for retirement and other long-term goals painless. The user answers a question about risk tolerance and sets a goal amount. Digit sets up an IRA that invests in Vanguard funds that match the customer’s preferences — conservative, moderate or aggressive. Non-IRA investment accounts are invested in BlackRock exchange-traded funds.
“We purposely made this very simple,” Gorman said. “We've heard from members there's this experience of a paralysis of choice when it comes to investing and it ends up leaving people out of the stock market.”
Digit monitors the customer’s bank accounts and determines how much that person can afford to contribute while still paying regular bills and meeting other goals. It sets aside small sums of money each day for the long-term investments.
Because there are tax implications to withdrawing money from a retirement account, the money is only invested in the IRA once a month, and the customer is alerted beforehand.
“The thinking behind that is that if you need that cash, you can take it out at that moment and not have it sent off to a portfolio,” Gorman said.
Digit partners with DriveWealth, a registered broker-dealer, on the retirement account.
All the savings and investing features of Digit are included with its $5 monthly membership fee.
“We know that preparing for the future is critical,” Gorman said. “We're going to continue to invest wherever we see that we can make the biggest impact."
